Equitrans Midstream (ETRN) is going to cautiously continue with the Mountain Valley pipeline. The process with this project is in sharp contrast to the dispute that Dakota Access Pipeline (DAPL) involves Energy Transfer (ET). As a result, Equitrans Midstream shareholders have few of the worries of Energy Transfer Shareholders.
Equitrans Midstream really waited for some key court cases before deciding how to proceed. That may have raised the costs some but it prevented the possibility of liability issues that Energy Transfer may or may not face and it probably will save a lot of legal battles. The environmental crowd can still cause some headaches for the Equitrans Midstream project. But that is true of any project. Still the careful progress made here will save some money over the “full steam ahead” approach of Energy Transfer management.
There is no doubt that the permit process needs a thorough review and update. No process was ever designed for one group to hold a project hostage forever. However, management is paid to deal with the present and the environment at hand. Controversy should be avoided when possible with an emphasis to stay out of court as much as possible. Clearly Equitrans Midstream management has made a far better assessment of the hurdles to clear before this pipeline begins operations.
Not Done Yet
Management still has to complete the pipeline and get it running. The opposition is probably not out of legal maneuvers yet. However, the road to completion now appears to be more clear cut and less risky than it has been in awhile.
Source: Equitrans Midstream Corporation Second Quarter 2020, Conference Call Slides.
As shown above the project cost has increased minimally when considering the dispute situation. More than a few analysts have questioned the completion date . Therefore this project is still by many measures risky and its profitability uncertain.
However completion does now look more certain than it has in the past. The simplification of the midstream structure into Equitrans Midstream Corporation (with dividends) further enabled the surviving company to better deal with the situation. Once this project completes it could be one very valuable asset due to all the latest hurdles overcome in getting the pipeline built.
Finances are a little on the stretched side. This is happening due to the delays involved in a major project as noted above. There are goals to change that in the future.
Source: ETRN Accelerated Total Transformation Slide Presentation March 2020.
The major problem currently is that until the Mountain Valley Pipeline is complete and operating, both delays and the accompanying cash requirements could place any distribution in danger. Therefore this particular midstream has to be an above average risk that has little to do with current finances and everything to do with delays and potential court battles.
“Outstanding Debt and LiquidityAs of June 30, 2020, ETRN reported $6.4 billion of consolidated long-term debt; $485 million of borrowings and $235 million of letters of credit outstanding under the $3 billion revolving credit facility; and $202.3 million of cash.”
“Mountain Valley Pipeline On June 15, 2020, the Supreme Court of the United States reversed a lower court decision regarding the U.S. Forest Service’s authority to grant a right-of-way to cross the Appalachian Trail. The positive ruling clears the path for MVP’s Appalachian Trail crossing. MVP JV expects a new Biological Opinion to be issued shortly, with certain forward construction activities resuming upon approval from the U.S. Federal Energy Regulatory Commission (FERC). Following the Biological Opinion, MVP JV expects to receive the Nationwide Permit 12 from the U.S. Army Corps of Engineers, which combined with FERC approval, will allow water body crossing activities to resume.
MVP JV is targeting an early 2021 full in-service date for the project. Based on the project’s current $5.4 billion budget, ETRN expects to fund approximately $2.7 billion of the total project cost and, through June 30, 2020, has funded approximately $2.1 billion. In order to adapt the construction plan for potential complex judicial decisions and regulatory changes, total project costs may potentially increase by approximately 5%. ETRN expects that it may be required to fund approximately $175 million related to the potential increase in project costs.”
Source: Equitrans Midstream Second Quarter 2020, Earnings Press Release
This partnership does not really have the cash flow from operating activities to properly support the debt load at the current time. Expected EBITDA is roughly $1 billion for the year. With total debt over $6 billion, the key debt leverage ratio is far from satisfactory.
Normally pipelines complete and the beginning service solves that problem. Here, there has been a court fight and Mr. Market fears another court fight over the Biological opinion (among other things). Therefore there could be a protracted delay.
Interest and debt has to be paid whether or not the pipeline goes into service. That is a particularly important consideration when the service involves a material project like this one. Normally, debt financing for pipelines is not that risky because those pipeline begin service on schedule and on budget. However, court fights add legal fees and additional interest that needs to be financed.
Therefore the delay threat does cause some financing issues that could predominate over the need for a distribution until this project finally begins operations. The delay also adds risk to the project. The recent Supreme Court ruling did restore some sanity to the process. But it is easy to see how pipeline companies can get into untenable finance situations if they are not very careful planning the construction execution.
Equitrans Midstream now has a far simpler corporate structure to deal with the current construction issues. A Supreme Court ruling now enables the project to carefully proceed. However, there could still be some significant legal battles ahead that cause costly delays.
Therefore the current distribution has to be regarded as tentative in the future at best. In theory a large project should not have all this uncertainty. But times have definitely changed and investment strategies need to change with it. Therefore a company like this with so much exposure to a single major project is really not suitable for an income strategy until the pipeline begins operations and the financial health of the partnership can be assessed.
The corporate dividends are not safe as long as legal challenges and delay and potentially change the Mountain Valley Project plans. The Supreme Court ruling definitely helped the situation yet the amount of uncertainty remains high even after that decision.
Long term, this partnership now organized as a corporation has a bright long term future. The areas serviced tend to be growing areas in need of a cheap natural gas supply. Therefore Equitrans is probably one to keep on the watch list.
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Disclosure: I am/we are long ETRN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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